Gary Gensler says his door is open. Crypto companies say that’s not true

by Arthur · February 15, 2023

Jesse Powell, CEO of Kraken Bitcoin Exchange David Paul Morris—Getty Images

Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on politics and regulation.

On Friday, the day after the Securities and Exchange Commission announced a $30 million settlement with Kraken over its crypto betting service, SEC Chairman Gary Gensler appeared on CNBC’s Squawk Box. “Kraken knew how to sign up, other people know how to sign up, it’s just a form on our website,” Gensler told host Andrew Ross Sorkin.

“Oh man, all I had to do was fill out a form on a website?” Kraken founder Jesse Powell tweeted in response.

Since taking over the SEC in 2021, Gary Gensler has repeatedly made the point to the crypto industry: All companies should come in and register their products and services. Powell’s ironic response reflects a view, shared by many in the industry, that Gensler’s offer is not sincere.

So who is right? I decided to discarding Gensler’s invitation into the gaping underbelly of Crypto Twitter, asking some important questions: Why didn’t Kraken just register its staking product with the SEC? Why don’t other companies do it? I received a flood of replies, from lawyers with a focus on digital assets to Coinbase founder Brian Armstrong.

Here’s what I learned.

To offer and sell securities, companies must clear the project or service, or in some cases the platform itself, with the SEC. The definition of a security has of course become the central question for the crypto industry, but Gensler’s SEC has determined that almost all cryptocurrencies, with the exception of Bitcoin, fall under the category.

In other words, for a company like Kraken to offer its staking-as-a-service product, it needs to fill out a series of forms and get approval from the SEC. As Hailey Lennon, a partner at Brown Rudnick, put it, “The whole SEC narrative about coming in and talking to us and signing up is not real.”

Justin Slaughter, the policy director at crypto venture firm Paradigm, said Kraken could register as a bet broker-dealer or exchange, but it would need products to offer bets on. Gensler has taken the position that Ether is likely a security, but the SEC hasn’t specified, meaning it’s not clear whether companies can register Ether in the first place.

Rodrigo Seira, the crypto advisor at Paradigm, said that SEC registration forms are poor and ambiguous for a new field like cryptocurrency. They will need a clarification from the SEC, which Gensler has said he will not do. He added that the SEC probably wouldn’t approve the registration anyway, highlighting failed projects that have tried to register and folded, such as AirFox, Paragon and BlockFi.

Finally, I put the question to Paul Grewal, Coinbase’s legal director. He pointed to the fact that crypto companies have not been able to register during Gensler’s tenure. “We should be having an honest conversation about it in a public way rather than having private one-off actions as part of a rule-by-enforcement campaign that provides no clarity and only creates confusion,” Grewal said.

The dissenting voice came from Lee Reiners, a former Fed official and current policy director at the Duke Financial Economic Center. Called as a witness in Tuesday’s Senate Banking hearing on crypto, Reiners rejected “regulation by enforcement” of the crypto industry. “The truth is that it’s just a catchphrase that the industry uses to deflect from the fact that they have willingly chosen to operate outside the realm of regulation,” he told the assembled senators.

Reiners said the only people confused about regulation are in the crypto industry. They would probably add Gensler to that count as well.

Leo Schwartz
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@leomschwartz

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